Sortino Ratio Singapore
The risk-adjusted return metric that only punishes losses, not gains
The Sortino ratio measures risk-adjusted return by dividing excess return over a risk-free rate by downside deviation, the volatility of returns below a minimum acceptable level. Unlike the Sharpe ratio, it ignores upside swings entirely, only penalising the volatility that actually hurts an investor.
Not financial advice. All figures for educational reference only. Last updated: October 2026.
Key Takeaways
- The Sortino ratio only counts downside volatility, swings below a target return, as “risk”; it ignores upside volatility completely.
- The formula is (Portfolio Return minus Risk-Free Rate) divided by Downside Deviation.
- A higher Sortino ratio means better return for each unit of downside risk taken.
- It’s especially useful for strategies with asymmetric returns, such as S-REITs, option-selling income strategies, or portfolios with occasional large upside months.
- The Sharpe ratio, by contrast, penalises all volatility equally, including the upside swings most investors don’t actually mind.
What Is the Sortino Ratio?
Named after economist Frank Sortino, this ratio refines the idea behind the Sharpe ratio: how much return you’re getting for each unit of risk taken. The Sharpe ratio uses total standard deviation as its risk measure, treating a month of unusually strong gains the same as a month of unusually sharp losses, both count as “volatility” and both drag the ratio down.
The Sortino ratio fixes that by using downside deviation instead, the standard deviation calculated only from returns that fall below a chosen minimum acceptable return (often zero, or the risk-free rate). Upside swings, the months a portfolio does unexpectedly well, don’t count against it at all.
How Is the Sortino Ratio Calculated and Used in Singapore?
The formula is:
Sortino Ratio = (Rp − Rf) ÷ σd
where Rp is the portfolio’s return, Rf is the risk-free rate (commonly proxied in Singapore by the current Singapore Savings Bond or T-bill yield), and σd is downside deviation, the volatility calculated only from returns below the minimum acceptable threshold.
| Term | What It Measures | Risk Measure Used |
|---|---|---|
| Sharpe Ratio | Return per unit of total volatility | Standard deviation (upside and downside) |
| Sortino Ratio | Return per unit of downside volatility only | Downside deviation (below a minimum acceptable return) |
| Risk-Adjusted Return (general) | Umbrella term for both, and other similar measures | Varies by specific ratio used |
In Singapore, investors comparing S-REITs, dividend-focused unit trusts, or option-income strategies against plain equity index funds sometimes prefer the Sortino ratio because these strategies often have a lumpy, asymmetric return profile: steady income punctuated by occasional sharp drawdowns, rather than smoothly distributed volatility on both sides. The Sharpe ratio can understate how attractive such a strategy is, since it penalises the occasional strong month just as much as the occasional weak one.
Sortino Ratio Example
Two portfolios both average 6% annual return. Portfolio A has steady, symmetric swings around that average. Portfolio B has mostly small positive months with one unusually strong +18% month and one sharp -10% month. Portfolio B’s standard deviation (used in the Sharpe ratio) may look higher purely because of that one strong month, even though the one month an investor actually dislikes is the -10% one. The Sortino ratio, which ignores the +18% month entirely and focuses only on the downside, gives Portfolio B credit it doesn’t get under the Sharpe ratio.
Advantages of the Sortino Ratio
- Matches how investors actually feel about risk. Most investors aren’t bothered by unusually good months; they’re bothered by bad ones. The Sortino ratio reflects that asymmetry.
- Better for asymmetric strategies. Dividend, income and option-selling strategies with lumpy upside are judged more fairly.
- Customisable threshold. The “minimum acceptable return” can be set to zero, the risk-free rate, or any target the investor cares about.
- Complements, rather than replaces, the Sharpe ratio. Looking at both gives a fuller risk picture than either alone.
Risks and Limitations
- Needs enough data points. Downside deviation calculated from a short or sparse return history can be unreliable.
- Choice of threshold changes the answer. Setting the minimum acceptable return to 0% versus the risk-free rate can meaningfully change the ratio.
- Not widely quoted by Singapore fund platforms. Most factsheets show the Sharpe ratio by default; the Sortino ratio often needs to be calculated separately from monthly return data.
- Still a backward-looking measure. Like all risk-adjusted return ratios, it describes historical volatility, not a guarantee of future risk.
Sortino Ratio vs Sharpe Ratio
| Sortino Ratio | Sharpe Ratio | |
|---|---|---|
| Risk measure | Downside deviation only | Total standard deviation |
| Penalises upside volatility? | No | Yes |
| Best suited for | Asymmetric return strategies (REITs, income, option-selling) | Broadly symmetric return distributions |
| Availability on fund factsheets | Rare, usually needs manual calculation | Common, widely quoted |
| Formula input for risk | σd (downside deviation) | σ (standard deviation) |
Frequently Asked Questions
What's the main difference between the Sortino ratio and the Sharpe ratio?
The Sharpe ratio treats all volatility, upside and downside, as risk. The Sortino ratio only counts downside volatility, swings below a minimum acceptable return, as risk, and ignores upside swings entirely.
What counts as a good Sortino ratio?
There’s no universal cutoff; it depends on the asset class and comparison group. As a general guide, a Sortino ratio above 2 is often considered strong, and above 3 very strong, but always compare within similar strategies rather than against an absolute benchmark.
What risk-free rate should I use for a Sortino ratio calculation in Singapore?
Investors commonly use the current Singapore Savings Bond (SSB) first-year rate or the latest 6-month T-bill yield as a practical proxy for the risk-free rate in a Singapore context.
Why would an S-REIT investor care about the Sortino ratio specifically?
S-REIT and dividend strategies often have lumpy, asymmetric returns, steady income with occasional sharp price swings around distribution announcements or rate-sensitive periods. The Sortino ratio avoids penalising the occasional strong upside month, giving a fairer read of the downside risk actually being taken.
Can the Sortino ratio be negative?
Yes, if the portfolio’s return falls below the risk-free rate used in the calculation, the numerator becomes negative, producing a negative Sortino ratio regardless of how low the downside deviation is.